Grouping, in-group bias and the cost of cheating

The tendency of people to divide into groups and to show in-group bias – preferential treatment for insiders – is widely observed. This paper shows that it arises naturally when people incur a moral cost when defecting against cooperators, provided that this cost is concave in the number of such defections. If some people are asocial, i.e. insusceptible to the moral cost, then, under incomplete information, free-riding and cooperation can coexist within groups. Costly signaling of sociality enables groups to screen out free-riders, but its availability may decrease the welfare of all individuals in society. Finally, the concave moral cost is shown to be evolutionary stable with respect to an invasion by a convex mutation.